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Striking It Poor

The cancer eating away at General Motors.

By 10.1.07

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Just how onerous are pension/health care liabilities for American automakers? Here's a sampling. General Motors currently employs around 5,700 workers in the state of Indiana. Want to guess how many retired GM workers there are in Indiana? More than 90,000 -- all of them drawing benefits.

You do the math.

Like Social Security, the numbers are forbidding: An ever-smaller pool of active workers are (in effect) having to support an ever-growing pool of ex-workers collecting bennies. But while Uncle Sam can raise FICA "contributions" levied on active workers to finance benefits for retirees, GM can only do one of two things.

The first is cut down on current payroll costs -- which it does in part by shuttering operations in North America while opening manufacturing facilities in lower-wage countries such as Mexico and China. Not only does this reduce direct payroll costs, it reduces future "legacy costs" -- since the non-union workers in places like China and Mexico don't get $40 per hour or a UAW-guaranteed health/pension package. It also makes it possible for GM to make a little more money per car -- and thus, to remain competitive with import brands that don't have the Albatross of billions in legacy costs hanging around their necks.

It's ironic that one of the big drivers of outsourcing is not so much corporate greed as it is corporate necessity. The UAW may not like to hear this, but the truth of the matter is that the plush bennies negotiated by the unions have helped to shutter American manufacturing and sent tens of thousands of American workers to the unemployment line while their jobs are sent overseas.

Of course, the unions adamantly refuse to see this -- and continue pushing for ever more bennies for ever fewer U.S. workers. Even though the goose that lays the golden eggs is already half-choked to death anyhow. But instead of relaxing the grip around its neck just a little bit, the unions just squeeze all the harder.

The other thing GM and other automakers can do -- and have done -- is eat the approximately $1,500 per car in legacy costs by "selling" cars either at a loss or at a competitive disadvantage relative to import equivalents. The obvious problem with that, of course, is you can't make money by giving away your product -- or by selling it at a return so low the competition is earning considerably more on each sale of its equivalent product. Not indefinitely, anyhow -- and certainly not when (unlike, say, Wal-Mart) your share of the market is in decline.

While Toyota accumulates a huge pile of reserve cash, GM (and Ford and Chrysler too) are barely making ends meet. This is bad news today -- but it's even worse news as far as tomorrow is concerned, too.

Why?

Because when you're running this lean, there's not a hell of a lot left over for R&D into new technologies, engine designs, car models/types. This is one reason why the Japanese are more "innovative" than American car companies have been in recent years -- bringing hybrids to market years before any American automaker did, to cite one obvious example. Toyota and Honda had the money to invest in hybrid development; GM and Ford didn't. The imports are also better positioned to revise and update existing models more often than American car companies can -- another tremendous competitive advantage in a marketplace that will not brook dated, obsolescent products.

A third option is to simply fold legacy costs into the sticker prices of new cars -- and make the customer pay for retiree health and pension benefits. But of course, the customers can elect not to pay by not buying the more expensive U.S.-branded vehicle -- so that's not going to work, either.

Bottom line: GM and Ford and Chrysler must find a way to sell their cars at competitive prices relative to the imports -- and make equivalent money on these sales.

If legacy costs -- and obstreperous unions -- won't permit this, the American automobile industry will very probably cease to exist within the next 5-10 years.

That is the reality.

And the UAW had better get religion, quick.

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About the Author

Eric Peters is an automotive columnist and author of Automotive Atrocities: The Cars You Love to Hate (Motor Books International) and a new book, Road Hogs.